Ed Yardeni Warns on Chinese Debt

We wrote in our quarter end letter about strong global growth as one of the factors driving the market higher. Today’s Morning Brief from Yardeni Research makes some interesting observations:

Global Economy: Hooked on Central Bank Money. Joe and I have some good news and some bad news. The good news is that the global economy continues to show signs of solid economic growth, as evidenced by data we monitor on the forward revenues of the major MSCI stock market indexes. Over the past couple of weeks, we’ve focused on five reasons why this is happening: (1) Global monetary policy remains ultra-easy. (2) Chinese bank lending is at a record high. (3) The 50% cut in oil prices since mid-2014 is a big windfall. (4) Mass immigration into Europe is boosting the region’s economic growth. (5) The global bull market in stocks is having a very positive wealth effect on economic growth.

So what’s the bad news? Much of the world’s growth is being driven by China. Nothing wrong with that other than the fact that China is on an unnatural high attributable to record-high injections of debt, which is the Chinese government’s drug of choice.

China: Debt Overdose. The problem with drugs that provide a high is that more must be taken over time to maintain the high. In other words, they lose their effectiveness. The abuser is forced to take more drugs or suffer the painful consequences of the inevitable lows. China is the world’s greatest abuser of the drug called “debt.” China keeps using more of it to sustain economic growth, which is slowing nonetheless. The government has talked about putting the country in a rehab program, but it has been all talk, which is a common characteristic of junkies. Withdrawal is hard to do.

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